A Resource Revolution - it's Gonna be Alright!

A Resource Revolution - it's Gonna be Alright!

Last week, McKinsey Global Institute launched a new report in London, entitled “Resource Revolution: Meeting the world’s energy, materials, food, and water needs.” It makes an intriguing argument: business could save as much as $2.9 trillion by 2030 simply by increasing the productivity of the natural resources they use.

This is timely since prices for commodities rank high on the agenda. And it is a robust argument because many technologies are available right now that could, according to McKinsey, offset the expected increase in demand for land and food over the next twenty years. These would counter the more than 80% expected growth in demand for energy, 60% for water and 25% for steel. Just 15 opportunity areas represent roughly 75% of these productivity gains, ranging from energy efficiency of buildings to moving to more efficient irrigation and e.g. electric arc furnace improvements in steel production worldwide.

One of the key graphs represents these opportunities, and is similar to the marginal abatement cost curve graph that McKinsey did on carbon markets two years ago.

Now, however, McKinsey is going a step further. Calling for “new institutional mind-sets and mechanisms,” the report takes a careful look at the manifold barriers to resource productivity and outlines strategies for better coordinated approaches. It favors price signals and in particular urges governments to tackle the challenge of unwinding the more than $1 trillion of subsidies on resources, including energy and water, that today keep prices artificially low. It furthermore calls for better financing and access to capital since at least $1 trillion more investment in the resource system is believed to be needed annually to meet future resource demands. And it stresses the need for public policy to bolster the long-term resilience of societies to resource scarcity, including awareness raising, education and some adaptation measures to counteract impacts on the poorest members of society.

The report goes beyond many existing studies in at least three ways:

  1. It is explicit about trends and future challenges, for example by calculating that the past ten years of price increases have wiped out all previous prices declines of the past century, and estimating that future demand will be affected by impacts of climate change. In other words, it warns that we can no longer assume a favorable long-term trend of declining commodity prices;
  2. It calls for a more comprehensive look at the nexus of natural resources used by companies, which is unfortunately lacking in many resource studies that focus on industries’ needs for certain critical minerals. Such an approach better highlights the millions of people driven into poverty by rising food prices and the interdependencies with economies worldwide;
  3. It provides a serious analysis of barriers that exist for businesses – such as high payoff requirements and low awareness for resources –, as well as for consumers and policymakers both domestically and internationally. A lack of transparency along mineral chains thus can also be considered a key barrier to resource productivity.

From a more academic perspective one can take the report as a good starting point for considering several key questions: what exactly is the bill that industries and economies pay for using all natural resources, including their negative external costs such as environmental degradation? How will new supplies such as shale gas change the international markets for energy and other commodities? How can industries join forces to address material leakages that occur internationally along supply chains without sufficient recycling capacities? What are the system innovations that can go beyond the opportunities and lower the demand for natural resources in the long run?

In the end, the report does not say much about potential resource-related conflicts that might occur if no action is taken. It is also left open how to assess what kind of coordinated approaches might work well on an international scale and what the perspective for international relations might be. Quite recently, the German Advisory Council on Global Change has called for a “global social contract” – a facinating perspective but probably not a concept likely to gain prompt favor among governments and corporations that continue to being shaken by the economic crisis.

When John Lennon and Paul McCartney sang that a revolution is “gonna be alright,” they probably had international civil activists in mind more than business. Now business has an opportunity to promote a revolution – with an eye to big profits down the road. In the face of new challenges, research is urgently needed to help develop a roadmap to guide the transition of whole economies towards sustainable resource management at a global scale. And as we look to begin this endeavor, it is good to see strong partners emerging!